The ATO has issued a Decision Impact Statement on the AAT’s decision in AAT Case  AATA 947, Re Gutteridge and FCT. In that case, the AAT allowed the appeals of 2 taxpayers (a married couple) and held that the husband alone was the person who controlled the relevant Trust within the meaning of s 328-125(3) of the ITAA 1997 and therefore that the Trust was entitled to certain CGT Small Business Reliefs. The Commissioner had argued that the daughter was a controller of the Trust and, therefore, the Trust was connected with another entity controlled by her with the effect that the Trust was not eligible for any of the Div 152 Small Business Relief. However, the AAT concluded that although the daughter was the director and public face of the business carried on by the Trust, the Trustee was not accustomed to act in accordance with her wishes. The AAT found the husband alone was the person who controlled the Trust within the meaning of s 328-125(3) of the ITAA 1997.
The ATO said the Commissioner accepted that the decision was open to the AAT in view of the findings of fact made by the Tribunal. However, the ATO noted that while the circumstances in the case allowed for a finding that a person could reasonably be expected to act in a certain way because they were “accustomed to act” in that way, the Commissioner did not accept that the “reasonable expectation” test in s 328-125(3) of the ITAA 1997 can be substituted with an “accustomed to act” test in all cases.
[LTN 53, 19/3/14]
Extract from Income Tax Assessment Act 1997 (ITAA 1997)
328-125 – Meaning of connected with an entity
(b) both entities are controlled in a way described in this section by the same third entity.
Direct control of an entity other than a discretionary trust
(a) except if the other entity is a discretionary trust–own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of:
(i) any distribution of income by the other entity; or
(iii) any distribution of capital by the other entity; or
(b) if the other entity is a company–own, or have the right to acquire the ownership of, * equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company.
Direct control of a discretionary trust
(3) An entity (the first entity ) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its * affiliates, or the first entity together with its affiliates.
(a) the trustee of the trust paid to, or applied for the benefit of:
(i) the first entity; or
any of the income or capital of the trust; and
(a) an * exempt entity; or
(b) a * deductible gift recipient.
(6) If the control percentage referred to in subsection (2) or (4) is at least 40%, but less than 50%, the Commissioner may determine that the first entity does not control the other entity if the Commissioner thinks that the other entity is controlled by an entity other than, or by entities that do not include, the first entity or any of its * affiliates.
Indirect control of an entity
(7) This section applies to an entity (the first entity ) that directly controls another entity (the second entity ) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity.
(b) a * publicly traded unit trust;
(c) a * mutual insurance company;
(d) a * mutual affiliate company;
(i) a company covered by paragraph (a);